Personal Finance: Avoid being mauled by the tiger economies

The next 12 months could be a fertile period for investors, but there's an injured tiger loose in the garden. While prospects look reasonable in the developed Western economies, the Asian tigers, with their economic problems, could still hurt the unwary. Guy Dennis reports on investment prospects in 1998.

The worst news from the Far East may have been and gone but the dangers are not over, warn fund managers. Some argue that the repercussions of the past few months' economic turmoil may still take time to impact fully and there could be further problems from the region.

"Our starting point [globally] is what's happening in Asia, which in terms of investment influences in the coming year is probably going to be the single most important in terms of what happens to equities," says Richard Urwin, head of economic research at Gartmore.

Clearly, the Far East itself is a risky bet, but with possible repercussions for the rest of the world, caution is needed. The three main contenders for investment are the UK, Europe and the USA.

The UK and Europe are investment front-runners, although neither is likely to rise dramatically and there is debate over which will deliver better returns. Europe has much to commend it, with companies there expected to deliver good returns.

Simon Key, chief investment officer at Framlington, explains: "There is a fundamental change in the way that European companies are being run. The restructuring that's going on in European countries in anticipation of economic and monetary union - and also because of shareholder activism - means that companies are being run more in the interests of shareholders."

However, others argue that the problem with Europe is that many of its advantages may have been anticipated and potential future gains in share prices may already have been factored in.

Andrea McNee, investment director at Britannia Investment Managers, says this is a key factor favouring the UK. "The UK probably looks the best in terms of valuation. Although Europe probably has reasonably strong earning flows coming up, it's actually priced in fairly fully."

She expects the UK's FTSE 100 share index to rise to 5,500 by the end of 1998 and a similar figure is predicted by NatWest Stockbrokers, where Jeremy Batstone, head of research, forecasts "5,500 or 5,600, so if you add dividend payments on top of that we're looking at a total return of maybe 11 or 12 per cent. So, a good but non-vintage year."

The UK and Europe may look stronger, but investors should not ignore the USA. It may not appear so attractive, as expectations of corporate profits decrease, but it still offers opportunities. Investing in the USA spreads risk, and its huge domestic market may be less plagued by the Asian turmoil. It should also be seen as a long-term investment prospect.

There may also be interesting opportunities in specific sectors. Andrew Barker, chairman of the Association of Investment Trust Companies and director of Foreign and Colonial Investment Trusts, points to healthcare and financial services as areas which could do well in the US this year. There may also be opportunities in the smaller companies sector - the huge domestic market allows small firms to grow rapidly.

There has been some talk of a possible revival in the UK for less highly- capitalised companies. Last year the FTSE index of top 100 companies massively outperformed the small and mid-market sectors. Despite this hoped-for revival in the small companies sector in 1998, some experts doubt whether any outperformance will match the growth in the FTSE 100 index compared to smaller stocks last year.

Investors should be careful, as Mr Batstone, of NatWest Stockbrokers, explains: "In general, you would expect smaller and medium-cap companies to do reasonably well, but we are being very cautious about those two and would suggest that investors stick to those small caps that seem to have a niche in their chosen area of activity.

"The market is in no mood to take prisoners with small caps as with large caps so if a smaller company comes out with a profits warning then that company is panned by the markets. One has to be selective and the golden rule for investors in these sectors is if you're not sure, then reduce your risk by spreading your portfolio."